The stock market is a device for transferring money from the impatient to the patient
Indian Primary Market has seen biggest boom in IPO Market in 2024. One of the emerging Market is lucrative for IPOs and people of all ages are foraging into IPO application. However, numerous pitfalls in IPO investing exist that can catch investors, particularly newcomers, off guard. Whether aware or not, investors often succumb to these common IPO mistakes, yet they are easily avoidable.
Grey market can help assess interest and potential listing prices, but it is an informal and unreliable mechanism, especially during market volatility, making it susceptible to manipulation and past investor disappointments.
Dealers and brokers buying applications have consistently failed to uphold their commitments. Relying exclusively on the grey market premium (GMP) for your investment decisions is a flawed strategy, yet the staggering number of individuals checking grey market rates daily only underscores the issue. This oversight firmly places it at the top of the most common IPO mistakes.
It is essential to exercise caution when considering investments in new IPOs, even if they are well-regarded by your peers. One should refrain from participating solely based on enthusiasm, particularly if the company operates within a market or segment that you do not comprehend. During bullish market conditions, numerous IPOs tend to be oversubscribed; however, not all offerings yield favorable returns.
At times, the liberalization of a sector can result in a significant number of Initial Public Offerings (IPOs), as demonstrated in the 1990s when the government deregulated the aviation sector, allowing several new airlines to launch their IPOs. Notable among these were NEPC, Damania Airways, and ModiLuft. Unfortunately, all of these entities disappeared without a trace within a few years.
It surely is a difficult task to dive deep and weed out unsound business models and companies but there are ways to circumvent this limitation. This is where our research and analysis section comes handy by offering independent and unbiased research and analyst reports.
Another entry in our list of common IPO mistakes. Many times, investors don’t realize that what they are playing isn’t a theme but just a fad (remember power and infrastructure in 2009?). Similarly, markets sometimes go euphoric and prompt investors to lose their senses. Any investment made at this time is likely to turn into a disaster as most likely, valuations and projections are sky high.
In his book, TrendWatching: Don’t Be Fooled by the Next Investment Fad, Mania, or Bubble, former CNBC commentator Ron Insana posits that history tends to repeat itself and that fads and bubbles are integral to this recurring cycle. Consequently, investors can safeguard their interests by identifying these indicators and divesting prior to the collapse of a bubble. We find this assertion to be accurate and have consistently cautioned investors regarding inflated valuations in IPOs. There is considerable reason to regard Insana’s advice with gravity, as he has engaged in capital management on several occasions, albeit with notably disastrous outcomes.
If an individual possesses astuteness, he or she can effectively disregard the noise generated by less informed sources as previously mentioned. However, another pitfall manifests in the form of subscription data, with investors frequently exhibiting a disproportionate emphasis on subscription figures rather than the underlying fundamentals of the company in question. In essence, this behavior is an extension of the earlier observation. It is important to note that subscription levels are susceptible to manipulation and frequently reflect the herd mentality prevalent among investors. A pertinent example is the Reliance Power IPO—one of the largest IPOs in India—which was fully subscribed within minutes of its launch and still holds the record for generating the highest subscription amount. The subsequent outcomes for investors are well known.
Caution is needed regarding interest from high net worth individual (HNI) investors, who often utilize leveraged IPO applications. Their additional interest costs lead them to sell on listing day, increasing selling pressure if the listing is poor. Consequently, retail investors may become vulnerable to volatility by focusing too much on HNI subscription rates.
Every investor who has engaged meaningfully in the markets for a duration of five years typically cultivates an investment philosophy, whether consciously or unconsciously. This development fosters a particular understanding and a degree of comfort with specific industries. Although this knowledge may be vague and intangible, it delineates one’s realm of comfort and, to some extent, competence, frequently aiding in the avoidance of mistakes related to initial public offerings (IPOs). Stepping beyond this comfort zone can be detrimental for investors, particularly if the markets experience a downturn.
Another significant indicator is an individual’s capacity to remain invested, which must be assessed in conjunction with the previously mentioned concept of the comfort zone. This aspect is fundamentally behavioral regarding the investment process, and it is not unusual to observe even well-informed investors liquidating their positions at diminished values due to panic selling. Buffett’s guidance proves advantageous in this context, as he advocates for investing in enterprises that are likely to thrive in prosperous conditions, even in the event of a stock market shutdown lasting up to ten years.
This situation is not merely one of several mistakes associated with initial public offerings (IPOs); rather, it reflects a more significant issue concerning improper asset allocation. Investors frequently overestimate their capacity to remain invested in the market or in particular stocks, leading them to invest all surplus funds without discretion. Consequently, when market downturns occur, these investors fail to capitalize on lower prices due to the absence of available cash reserves and also encounter difficulties in managing other financial commitments. More often than not, equity investments are the first assets liquidated when the need for funds arises. This practice is undoubtedly among the most costly mistakes related to IPOs.
SEBI has revised the process of IPO allotment, mandating that all retail applications (those amounting to less than ?200,000/- are given equal consideration, regardless of their volume. Provided that the retail portion experiences oversubscription, the likelihood of allotment remains consistent across the entire range of applications. By submitting larger applications, investors inadvertently commit a more substantial amount of capital while the probability of receiving an allotment remains unchanged. This phenomenon represents one of the most common IPO mistakes that investors continue to commit.
As one can see, avoiding these IPO mistakes is not really difficult. Our readers get a dose of this advice quite regularly through our analysis of upcoming IPOs. Nevertheless, please let us know if you find something worth adding to this list by commenting below.
